To understand Internet of Things you need to understand Zenefits

Internet of Things is a buzzword in many board rooms in 2015. Enterprises from logistics to construction to healthcare, are seeing IoT as the source of data-driven cost savings and competitive advantage. For example allowing building operators to drastically save maintenance costs or allowing farms to have real-time insights that can systematically increase the yield of their crops. But there is a much bigger business model shift taking place. One that will cause traditional industry boundaries to collide and some to even collapse.

To understand how IoT will change the business world, you need to understand Zenefits.

Zenefits is one of those unicorns media loves to talk about and VCs would crave to fund. Since launching in May 2013, Zenefits reached $20 million run-rate by the end of 2014, and is projected to reach $100M run-rate by end 2015. And it just raised a whopping $500 million series C at a $4.5 billion valuation. Andreessen Horowitz, the famed venture capital firm now lists Zenefits as its largest investment to date.

Zenefits is an insurance broker disguised as free online HR software. The California company offers SaaS HR services to over 10,000 small and medium-sized businesses to help them manage all their HR processes in one place. Best of all it’s free. Zenefits earns commissions on health, dental, vision, life, disability, or any other insurance, every time their SMB customers open up a new health plan or onboard a new employee through its SaaS solution (In the US, every company has to offer their employees minimum health care).

Zenefits adds value in helping small companies manage the complexities of HR. It captures value as an insurance broker.

In essence, Zenefits is an insurance company that offers free SaaS services to acquire customers. SaaS requires low-cost low-touch sales and so Zenefits profits on the delta between the customer acquisition cost (CACs) in the HR and SaaS industries. Of course, Zenefits creates a captive audience which it then can resell into more insurance services and higher profits.

Wired magazine calls Zenefits’ business model “crafty and unusual”; crafty in using indirect models to profit, but as we’ll soon see Zenefits’ cross-industry business model is not unusual, but relatively unknown.

In fact cross-industry subsidies are business as usual for mobile industry disruptors including Google (providing the Android OS for free), Amazon (providing e-readers at cost), Xiaomi (providing mobile phones at cost) and WeChat (providing communications apps and storage services for free). At VisionMobile we’ve been studying how these companies have disrupted the mobile industry through Asymmetric Business Models (see our earlier report on the topic) a business model that crosses industries, by forcing profits to migrate from one industry to another. And we argued in that paper:

In the digital era, companies can get an unfair competitive advantage by breaking industry boundaries.

The next diagram shows how Google, Facebook, Amazon and Xiaomi have been transferring profits across industry boundaries, and thereby enjoying an unfair advantage.

Apple has an unfair advantage over Nokia by offering a library of over 1 million apps and 40 million songs, while capturing value in premium connected devices. Google has an unfair advantage over Yahoo and Microsoft in Search when capturing value in online advertising by creating value in the free Android that allows smartphone, tablet and IoT makers to compete. Amazon has an unfair advantage over eBay and Wallmart, by offering Kindle tablets at cost while capturing value from that captive audience in e-commerce sales. Xiaomi as unfair advantage over Samsung by offering rock-bottom priced devices and wearables to its fan base, while capturing value in e-commerce services. WeChat has an unfair advantage over telecom operators by offering free messaging and voice calling while capturing value in e-Commerce, brokering anything from branded emoticons to car sales.

Last but not least Facebook. [tweetable]What Facebook lacks in vision it makes up in execution[/tweetable]. Its Facebook Messenger, now at 700 million users, has been copying the asymmetric business model of WeChat by allowing games to be bought and played within Messenger. David Marcus, head of Messaging products at Facebook sees voice calling within Messenger as a platform for much bigger things:

VoIP is just one way that the company hopes to use the messaging app as a platform for much bigger things, including online payments.

IoT is taking industry collision to the next level

What Zenefits, Google and weChat have pioneered, IoT is taking to the next level. Internet of Things is adding connectivity and computing to thousands of everyday products. Today, most of these objects are following a “one device, one app” paradigm – by slapping an app to a thermostat, car or building management system.

Over time, we believe a new paradigm of “one device, apps everywhere” will prevail. In this paradigm, data is not a function of the device, but a product.

Think of a fitness band that uploads data into a health service, and allows you to run low-cost, daily health check-ups. Think of a door lock whose data is used to make intelligent decisions about the temperature you set your home to. Think of a smart home security system whose data is used to make decisions on home insurance premiums.

Now that we have an understanding on how Zenefits, Xiaomi, Amazon and weChat use asymmetric business models, we can see that IoT will effectively unlock data from connected things in any industry and monetise that data in another industry. Fitness band makers will capture value in health services. Door lock makers will capture value in the energy market. Car makers will capture value in employee productivity management. Telecom operators will capture value in selling insurance.

Effectively, IoT allows hardware vendors to divorce the business model of the device from that of the data that are generated by that device. Once divorced, the business model can “invade” complementary industries.

Naturally, companies who use asymmetric business models will wield an impossible-to-beat advantage to their competitors who are caught unawares by new players that do not plan to make profits in their industry. And as we argued earlier in our post on Commerce of Things, an unconnected object will be a missed business opportunity. At the same time, connected objects can threaten your business with unfair competition from other industries.

Xiaomi is leading this new era of asymmetric business model era by example – far beyond the cost disruption that mainstream press think it is – and is just about to disrupt the home security industry. Xiaomi just launched their first home security solution for 199 RMB, a set of beautifully designed white-coloured products that, can be easily mistaken for Apple China products selling at 199 USD and not 199 RMB. Yes, at a price of about 30 USD for a full set of home security products, that connect and complement nicely other Xiaomi devices from mobile phones to air purifiers, it is obvious that Xiaomi is not looking at making profit on these devices themselves, but on leveraging data collected from their customers (the “Mi fans”) to provide even more valuable services to them over time. If we assume that Xiaomi is selling these products at cost like they do with their mobile devices, they are in effect securing a first entry in the valuable “home IoT” segment at zero cost of customer acquisition. Traditional home security companies better brace for impact.

For those companies in IoT, and even those bringing the IoT and ABM buzzwords in their boardrooms, here’s the recipe for your next executive strategy meeting:

Find any industry with a lower customer acquisition cost than yours (e.g. SaaS). Develop or acquire a product in that industry that is a complement to your core business and wrap it around your business.

And just like in the mobile industry, [tweetable]most IoT devices will eventually be offered at cost, if not below cost[/tweetable], so beware of newcomers to your industry bearing gifts.

Be prepared to challenge the age-old definitions of industries and markets. The world is becoming an unusual meal of business model spaghetti.

P.S. For readers in Europe, it can be worrying that US and Asia seems so far ahead in using asymmetric business models, from Amazon and Google to Xiaomi and weChat. If Europe wants to stay competitive, including in the digital era, it needs to use such competitive business models, too.

–Andreas Constantinou
As CEO and Founder, Andreas oversees the growth and strategy of VisionMobile. He has twelve years experience in mobile, having worked with the top brand names in the mobile industry including Telefonica, AT&T, Telenor, Vodafone, Deutsche Telekom, MTS, Nokia, Sony, RIM, HTC, Qualcomm, Ericsson and Microsoft. Over the last five years, Andreas has grown VisionMobile into the leading, most respected research firm on app economy and developer economics, with a client base and reputation that out rivals companies many times the size.Andreas on LinkedIn

–Nicolas Sauvage
Nicolas Sauvage is a “Software guy”, since first programming at 8 years old, and forever passionate about Software contributing to a better Connected World. He joined the management team of NXP Software in Feb 2011, and took various responsibilities over time including leading the OEM Business Line, worldwide sales, product management, Head of Korea, Head of Greater China. He is an Alumni of TTPCom, OpenPlug, London Business School and INSEAD.Nicolas Sauvage on LinkedIn